Relationship between Macroeconomic and Bank Specific Factors with Non-Performing Loans of Sri Lankan Commercial Banks

Abstract

The main purpose of this study is to ascertain the effect of bank-specific and macroeconomic factors on non-performing loans in commercial banks in Sri Lanka over 11 year’s period from 2013 to 2023. The study employed panel data methodology to investigate the effect of bank specific and macroeconomic factors on non-performing loans. Panel unit root test has been undertaken in order to test the stationary of the variables. Hausman test and Wald coefficient restriction test was used to select the appropriate model out of pooled, random, and fixed effect. Findings revealed that return on assets as a proxy for bank efficiency has a significant negative influence, while non-interest income as a proxy for income diversity is positively correlated with non-performing loans of commercial banks. Both real gross domestic products and lending rates were highly significant in both bank types. On contrary with literature, growth in bank branches is negatively correlated. Public banks do not account for higher level of non performing loans compared to their private counterpart. Finally, it was identified that macro and bank specific factors had an effect on the level of nonperforming loans in commercial banks. The research would have benefited if the analysis is carried out among classified types of loans offered by commercial banks. Future researchers should involve in identifying the most significant contributing loan type to the non-performing loans and its determinants. This study is one of the few studies which have investigated the causes of non-performing loans in the commercial banking industry in Sri Lanka. The analysis of macro and bank specific factors and its impact on non-performing loans is the first study of that nature to be conducted in the context